Building redundancy into a previously optimized industrial economy

Redundancy in business is not rewarded via cashflow.

I will give you a Wyoming metaphor: Once you climb on the bull, there is nothing you can do to alter the outcome.

Funny ... good metaphor. OUCH!

Actually, there are things that must be done. The world will spin and things will need attending to for those not on the bull.

-- A safety net needs to be jury- rigged into place. This crisis is serious; people in America will freeze and starve if there isn't some sort of basic care plan put into place. Having the National Guard drive around in circles will not cut it. Our government is failing to perform its duty and officials deserve to be prosecuted for dereliction and gross negligence. The worst may not happen, but it appears that it may. If it doesn't and we have a chance to avoid disaster, preparation for disaster is a good drill. If the worst happens and the economy grinds to a halt it is imperative to be prepared.

-- A plan must be developed for a command economy. This is the form of economy that will take the place of our current mess after it's done and a fork is stuck in it. The presumption is the crisis will develope quickly to the point of total collapse because of the amount of debt and unfunded liabilities overhanging the productive part of the economy. In this case the transition to the coammand economy would take place right away.

If the collapse is instead a slow decline, as in the 1930's, the government can attempt the run of ad- hoc remedies that were part of the New Deal or it can cut to the chase and embrace what will work; the command economy.

Paulson, Rubin, Summers, Bernanke et al have about as much chance of setting up a command economy as they do riding saddle bronc. There are records from the Roosevelt administration as well as a few old- timers still alive who could instruct bureaucrats how to set one up and make it function properly. Or, the government can send so people over to observe the Chinese, who have a tightly managed almost- not- quite- command economy.

The goal of the command economy would be three- fold. One would be to insure that everyone has renumerative work and sustain themselves over the transition period. The work would certainly not be war- related as it was in the 1930's and 1940's; there are a lot of infrastructure issues that need fixing, plus the business of survival will require a lot more capital and labor than is visible in our current form of widely distributed production. Second, would be to prepare the transition to the 'post- command' economy, which will be a lot different than what we have now ... and will probably be unfamiliar to anyone except for a few academic economists. The third aim would be to simplify the production cycle and get people in America used to making do with less . This will also be the most effective way to boost energy production. Btu's not used in the moment ... will be available for use later.

An incidental outcome would be the central government would husband ... or grow ... relevance as the result of services provided ... rather than by the exertion of government 'authority'.

Right now, it has diminishing authority and no plan, except for the sort of plan made by bank robbers ...

In a world with declining extractable resources, there is no way there can be very much long term debt. Repaying the debt with interest will take too many resources.

In fact, I don't think it is a coincidence that the current debt defaults came at a time in history when oil extraction has flattened. We now longer had the underly resources growing at the rate they needed, to keep up with the debt, plus interest. Admittedly, the poor judgment of many in the lending industry may have hastened the process, but it was just a matter of speeding up the inevitable.

When you equate credit with modernity, I presume you are only looking at very short term debt. Paying wages at the end of a two week period. Paying for goods after they arrive. I can imagine this continuing, but long term debt, and even monetary systems that depend on long term debt, have to be replaced by more appropriate systems to our new more-constricted resources.

Except that savings is not a pool. When:

Investment + Debt-financed consumption + (Trade Surplus) + (Government Budget Deficit) is bigger than 0, there is net saving in that period.

That saving is the accumulation of the promises from going concerns financing the investment, and the promises from consumers financing the consumption, and the promises from the Rest Of the World (ROW), financing the ROW trade deficit, plus the promises from the government created when government spends that were not in turn extinguished by tax receipts.

The "pool of savings" is an accumulated pile of promises.

When the evolution of the economy means that those who have made promises are more and more able to make good on them, that is increasing financial robustness.

When the evolution of the economy means that those who have made promises are less and less able to make good on them, that is increasing financial fragility.

Stochastic risks are readily taken into account in fancy financial modelling, because stochastic risks are being realized at an ongoing rate. But systemic risks tend to be realized in clumps.

At the turn of the Century, the US adopted a policy of experimenting with whether firms chasing returns on a time frame of a quarter or quicker would find ways to systematically under-rate systemic risks and so take out as income what should have been retained as prudential reserves ... essentially, stripping buffers out of the system.

CDO's were not regulated, CDS's were removed from regulation by any federal authority and could only be regulated by state authority if they represented actual insurable risks ... that is, only the least problematic of CDS's could be regulated, not the creation of CDS's and their acquisition by those without an actual risk exposure, which allows CDS's to be created that are many multiples of the actual asset at risk of default.

Indeed, in addition to the above essay, should be added systemic risk concentration and systemic risk amplification.

"Trash" tranches of CDO's represent a concentration of systemic risk, by the nature of the junior/senior preference on claims of income from mortgages. But the demand was for investment-grade rated CDO's. So they built CDO's OUT OF CDO's, "second tier" CDO's that use the same Senior/Junior preference claim system to generate "investment grade" quality CDO's out of a pile of trash-grade CDO's. It was financial magic that worked precisely by systematically under-estimating systemic risk, so that the concentration of systemic risk meant that the quality of the supposed investment grade seoncd-tier CDO's were not in fact investment grade.

And then sometimes a third tier was built from the trash from second tier CDO's. Where in case of a "unexpected" (but quite widely anticipated) across the board increase in mortgage default rates, the senior tranches in the third tier would be senior preference claims on zero money flowing in. Oops.

And the lack of requirement for an insurable interest to hold CDS's meant that rather than regular insurance that shifts exposure to default, the by-law-unregulated naked CDS's could multiply the exposure to default.

And both were happening at the same time, so that institutions that were supposedly holding all investment grade assets, but in reality were holding a large quantity of chickenshit assets, could have their hidden risk of default multiplied by people taking bets on whether or not they would default. And since CDS's are not regulated as insurance, so there is no requirement that issuers actually have a balance sheet that would be able to cover total CDS exposure even in normal financial conditions.

So strip out storage buffers, add network interconnections, and add failure amplifiers to the system. Its like you start with the diary's network system and then add a process that generates network traffic to attempt to notify everybody that there is a network problem, creating an internally-generated denial of service attack.

IOW, we were creating a system encouraging promises to be made that could not be kept. Once we allowed that, the other side of the liabilities would show up somewhere as savings that people thought they were holding even though the promises were on shaky ground.

Blaming the pool of savings for the problem is like blaming the thermometer for a high fever.

Ecology studies what makes interconnected systems prone to collapse or resilient ... its not like any of this is a mystery. It was just in the short term interests of those handing out as income what should have been prudential reserves and pretending that high yield junk assets were high yield investment grade assets to turn a blind eye and replace what we know about how systems work with market-faith ideology.

I am very pro-globalization and have been since I was a teenager and attended an international school and felt the liberation that comes from getting one foot out of my culture.

The problem here lies in conflating cultural exchange with trade. In this era of the internet there is no reason - so long as the internet functions and is generally available - that cultural exchange might continue while localization ends much of global trade.

Cheers

"I am very pro-globalization and have been since I was a teenager and attended an international school and felt the liberation that comes from getting one foot out of my culture."

I think you are confusing globalization; the theory that all economic activity should take place in the physical location which provides the lowest financial costs and greatest ROI, with multiculturalism; the practice of mingling many different cultural groups together and cross-fertilising food, culture and language.

London, I am told, is a good example of a globalised non-multicultural city. Although many cultural groups exists, they do tend to remain static in various fixed enclaves in the city (West Indians, Central Asians, etc etc).

Human nature means that next go round we will screw it up again except we will do it differently.

And what were the thoughts of Keynes and Friedman on financial fraud-did they feel there should be penalties or should the perpetrators be elevated to positions of high importance? IMO until the tolerance for financial fraud lessens the whole situation is going to get a lot worse-just yesterday Taiwan publicly called Moodys et al a bunch of criminals-the USA can let the grifters run the country but they cannot force the entire world to finance it forever.

But what you are doing (ecological economics) is still economics

Don - first of all, I do not subscribe to everything about ecological economics, even though its where my phd program resides. They have gone too far in putting $ values on nature and not far enough exploring human nature and our evolved demand mechanisms. In fact, EE is being slowly subsumed by cognitive neuroscience, evolutionary psychology, and even conventional economics, which are all painting a picture that man as rational actor is the exception not the rule.

Economics plain and simple, is human behavioural ecology applied to a large population that had access to a perceived unlimited energy supply. The 'economic concepts' of value within economics that you point out are more psychological and behavioural than economic. Economics applied to an era of human behaviour when the planet was empty and there were few planetary resource limitations. What will replace it might contain some of the economic 'rules' (e.g. comparative advantage), but will fall under a biology/natural science umbrella.

Agree that economics has some useful observations about human behavior some of the time. But most economic concepts are either based on tautologies (utility is that which is preferred which is utility) and conflated understanding of wide boundary correlation causation. The main difference between walrasian welfare economics and ecological economics is the latter assumes the human system is embedded in a larger system, where the former assumes the environment is part of the human economic system. On that point, I am 100% in agreement with the ecological economists..

Keynes of course said that his recommendations during the Great Depression were for the problems of the Great Depression, but he also argued that his theory of money, employment and interest was a General theory.

The real flaw was in the effort after the war (and Keynes' death) to try to negotiate a cease-fire inside economics departments with a bastard child of General Theory macroeconomics and marginalist microeconomics. That is what gave us the post-war Samuelsonian hydraulic Keynesian economics.

But while the General Theory makes no assumption about natural resources, and can certainly be applied to economies facing serious natural resource constraints, hydraulic Keynesian models tacitly assume unlimited resources, so the "Keynesian policy" stereotypes that people pick up are fatally flawed ... and indeed, that is a big reason why bastard Keynesian/marginalist economics fell over in a heap in the face of the first two Oil Price Shocks.

Marginalist economics must take the viability of the economic system for granted in its analysis, because system viability is not something that can be ensured by marginal optimizations. And any marginal optimization must occur within a given system, so the marginalist economics must also take for granted "the system that we should have".

Therefore, when faced with fundamental questions of economic development and survival of an economy, marginalist economics can only address secondary issues, and is incapable of addressing the main issues.

However, that does not mean that "economics" generically is fatally flawed ... while marginalist economics define economics as applying marginal analysis to a problem, if we define economics as the study of the material provisioning of society, there are a range of approaches to the understanding of economics that provide a line of attack on big questions of economic development and economic survival.

Economist Arnold Kling's opinion:

I have always thought that the issue of the relationship between financial markets and the "real economy" was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed. But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men's urge for mathematical masturbation.

Quoted in Intellectual honesty: how much do we know?

Where did you get your data?

I would love to see that graph extended to sometime before the crash of 1873.